Environmental ERP Software: An Emergent Technology Takes Root

Since the industrial revolution, businesses have consumed greater amounts of energy and generated larger amounts of waste in order to meet the needs of global demand for products and services. Business today face a complex and varying regulatory structure that has been established as a means to safeguard and control the environmental impact of meeting this demand. With the increasing emphasis on corporate sustainability, companies are making a concerted effort to curtail the negative externalities of economic production. But in order to affect environmental change as well as comply with the dizzying array of regulatory reporting requirements, corporate decision makers need actionable information about the facilities and processes they manage. As a company’s business model becomes larger and more complex, an innovative solution is required to maintain situational awareness. A growing number of businesses are concluding that an environmental enterprise resource planning (ERP) software solution will provide the answer. This begs the question; is environmental ERP software appropriate for a company that is concerned with sustainability issues? The answer, as will be presented in this paper, is Yes,but that it also depends on your business strategy.

Background

The following discussion will provide business leaders with a general description of the merits and considerations involved in implementing environmental ERP software. In brief, the basic benefits of an environmental ERP system are reduced data collection, management, and reporting costs, improved regulatory compliance processes, and opportunity for savings through various environmental programs (e.g., energy saving program). Environmental ERP systems are transactional and informational in nature, but they also have the potential to become strategic tools when coupled with additional user innovation. An ERP system can be rented as a software service (i.e., SaaS), or it can be purchased outright as a capital investment.

A recent report from Groom Energy Solutions states that the market for enterprise energy and carbon accounting (EECA) software grew 400 percent in 2010, with similar growth projections for the following two years.[1] The report also found that “the vast majority of Fortune 500 companies now track and report carbon emissions.” This implies that environmental ERP solutions are beginning to cross the technology adoption threshold from early adopters into the early majority. Speaking in terms of technology hype, environmental ERP systems have likely moved beyond the “peak of inflated expectations” and potentially moved beyond disillusionment. Due to the strong value proposition and potential for these products, there will likely not be substantial disillusionment with the product.[2]

Figure 1 – EECA Purchases Per Year

Rational Decision Making Framework

When a company is considering the implementation of an environmental ERP system, a decision making model such as the one developed by Bauer and Erdogan[3] can be used to guide the decision-making process to ensure positive outcomes. Each company will have very different circumstances and decision points in choosing whether to implement an environmental ERP system and, if desired, which product best fits the company’s strategic business objectives.

Figure 2 – Rational Decision Making Framework

The model as shown in Figure 2 lists steps in the decision-making process. The process begins by identifying the problem. The problem, as discussed above, is that companies have to manage an increasingly vast amount of environmental data for cost cutting measures or maintaining compliance in a dynamic regulatory environment. The company will then identify the criteria that describe the ideal solution to the problem. Example decision criteria may include cost, ability to manage qualitative data, ability to flag outlier data or data of concern, and ability to manage multiple data units and conversions. The company ranks the decision criteria identified in the previous step and, if applicable, provide a weighting for each of the decision criteria. Next, the company will generate feasible alternatives. Common solutions that are used to address this problem include company-generated spreadsheets, third party custom-generated spreadsheets, renting an environmental ERP solution (e.g., software as a service), or purchasing an environmental ERP solution. The company then analyzes the alternatives using the decision criteria and selects the best alternative. Following implementation, the company will evaluate the success and effectiveness of the selected alternative. If additional problems are discovered, the decision-making model will start over with a revised problem statement.

Recommendations

With the increasing importance that sustainability plays in the business landscape, environmental ERP software is taking a prominent role. Like other strategic IT, these systems are used by companies to manage the many challenges and opportunities of the growing sustainable economy. In addition to enhancing information exchange and cutting costs through streamlined data management, these systems are also increasingly being used in a strategic manner to build competitive advantage. However, similar to traditional ERP systems, these software tools tend to be more appropriate for larger and / or more complex organizations, whether that complexity relates to the organization structure, the level of regulations or the environmental impact of the company’s operations or products. Companies that are smaller or tend to have smaller environmental footprints would not necessarily benefit from this type of product. These products need to align with overall strategy and organization of the business.

While environmental ERP software does not provide a competitive advantage itself, it enables companies to create competitive advantage ways that may not have been possible with older methods of environmental data management. If a company aims to leverage the software for competitive advantage, other individuals must be involved besides those with the responsibility to manage environmental issues. For example, if a material research team is encouraged to use information gathered from the ERP system, new processes or material substitutions could be identified. This type of continuous innovation is difficult to imitate because it develops incrementally over long periods of time and becomes progressively more complex with each marginal improvement.

Buying environmental ERP systems is an expensive venture. Finance departments have to work with IT to calculate the total cost of ownership. This includes the initial outlay to purchase the system, maintenance and customer support contracts, outside consulting services, as well as ongoing user interface. Consultants who are well versed in environmental and sustainability best practices should be involved. Most ERP systems provide reports, dashboards and analytics programs that can be used to identify and evaluate problem areas within the company. Corrective actions can be implemented and programs developed to achieve measureable cost savings. These cost savings, as well as brand improvements, consultancy, and maintenance contracts should all be included in the valuation of implementing the system.

As environmental ERP systems are still relatively new, additional considerations should be given to ensure the best chance of success in deploying a given software solution. One senior sustainability manager provided the following considerations for companies looking to implement environmental ERP software. Taking these types of actions into consideration may avoid the dangers of implementing an IT solution as substantial as ERP.[4]

Decide on hierarchy and organizational structure before implementation in order to determine how data will roll up, and the flexibility needs of your reports.

Know the specific goals for the software, whether for reporting emissions, progress against environmental goals, or initiative tracking.

Understand who will be the eventual software users and what they will use it for.

Engage with stakeholders up front to review the data sets, reports, and capture inconsistencies before you load the data from your existing spreadsheet into the ECA software.

Identify the sources of data including determining the process and data ownership.

In addition, systemic effects should be considered prior to the implementation of an environmental ERP system. The deployment of an ERP system will require some departments or process areas to manage and report data that was not previously required. Environmental, health, and safety (EHS) staff have historically managed environmental compliance data. However, the types and volume of data currently tracked and managed in these systems may surpass this role, cutting across departments and moving up the business organization. The potential for user frustration with the product and resistance to change is always a consideration with enterprise IT applications.

Furthermore, top management might be inclined to standardize data collection across all their local subsidiaries when an ERP is being implemented. But such comparisons can be misleading. For example, some regions rely on electricity generated through cleaner energy sources, while others rely on electricity generated by coal or natural gas plants. By standardizing metrics, some local managers might be hamstrung by data that is beyond their control.

While the value of implementing environmental ERP software is becoming increasingly well documented, there are also some dangers that can come from this technology. For example, since ERP systems allow management of data and generation of new information, some companies may not be ready or willing to manage the data or address the potential questions that arise when issues are discovered. This is discussed in the next section when considering ethics.

Ethical Considerations

Companies who own environmental ERP systems face several ethical dilemmas. While the system itself may not be ethically questionable, the manner by which the data is collected, managed, and communicated may evoke ethical ramifications. Once data is actively managed, information will be generated which can expose potentially questionable practices of a company. Managers have to be ready to handle the information that may be discovered.

An automated system such as an ERP system could be more objective in analyzing and generating reports than other alternatives. Not only do managers have less control over what information will surface, they also have little excuse for flawed reporting. For example, ExxonMobil under-reported carbon emissions from one of its Scottish ethylene plants in 2008. ExxonMobil’s own system detected the discrepancy before the company had to report to the Social Electric Power Association.[5] In such cases of violations, managers who rely on environmental ERP systems face an ethical dilemma with three equally difficult options. They can either decline to feed the appropriate data to the system and avoid the conundrum, delay or stop the system from reporting the violation to the public, or decide to deal with the repercussions whether it is legal penalties, bad PR, angry customers, declining stock prices, or a combination of consequences. With an automated system, management does not have the luxury of pleading ignorant or blaming inadequate analytics. Additionally, in cases of disastrous accidents such as BP’s gulf of Mexico oil spill in 2010, management could decide to consider the incident as part of the data that should go into their Environmental ERP system, or they can decide that such data is an outlier that would significantly skew the reported analytics.

According to normative theory of business ethics[6], companies who own an environmental ERP system need to be mindful of the ethical ramifications of reporting environmental violations. Companies who ascribe to stockholder theory might be inclined to use the knowledge manifested from the system to improve efficiency and reduce costs solely in order to improve their shareholders’ returns. For instance, if a company realizes that one of its “sustainable” inputs incurs excessive costs without significantly improving the environmental report, the company might choose to downgrade to a less sustainable option. Similarly, the company might find out that it can save money by using a more toxic chemical. In contrast, companies that follow a wider stakeholder theory might use their information differently. While stakeholders may have a heightened respect for companies that are socially responsible, those same companies can be economically harmed by their own systems. In the end, companies using an environmental ERP must strive to steward the interests of their stakeholders and communities without indulging in hidden agendas.

Conclusion

In conclusion, we believe that environmental ERP systems are perfectly suited for large and/or more complex companies that strive to control their carbon footprint and sustainability impact. Like other IT systems, implementing an Environmental ERP systems should be driven by the company’s business strategy not the other way around. If a company’s main objective is controlling costs for example, then the ERP system should be geared towards this objective, and its performance should be measured through cost metrics. In itself an Environmental ERP system does not provide competitive advantage but if used strategically, a company can achieve operational efficiencies that can become disruptive to its competitors. By allowing users from all departments, rather than only health and safety staff, to use the system, efficiencies could be developed in different aspects of the business. Finally, when choosing which systems to buy, management should think about the total cost of ownership, their key business objectives, the structure of the organization, identify the data needed, and determine who in the organization will be the key users of the system.